A look back on anti-profiteering, its relevance and the need for well defined norms

Since a unified system was implemented, the immediate benefit lay in the higher availability of credit for both services and goods consumed by a business.

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Jun 26, 2018, 10.40 AM IST

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The best part under GST is that mostly all industries will be affected with respect to passing of credit benefit due to a better credit claiming mechanism under the this regime.

By Archit Gupta

Anti-profiteering is of special importance in the Goods and Services Tax regime. The implementation of GST law has brought benefits to both consumers and businesses. Earlier, services were governed by the service tax law and goods were governed by excise and VAT laws. Since a unified system was implemented, the immediate benefit lay in the higher availability of credit for both services and goods consumed by a business. No difference remained between these two credits, and they could be used to set off GST payments. Besides, since all businesses were now under the same tax, it meant higher credit availability for all.

Let us understand anti profiteering with an example. The tax rate on meals in restaurants has approximately reduced to 18% from the initial 20.5%. This means the food supplier should technically sell a Rs.100 worth food item for Rs.118 now and not Rs.120.5. As per the Anti Profiteering rules, this benefit of reduced tax rate should be passed on to the consumer in the form of reduced price. Not to forget the impact of reduced input costs, which must also be passed on. Another example that explains how certain businesses became eligible to claim input tax credit. Radio taxis earlier could not adjust the input tax on office supplies with the output service tax payable. Now, ITC on most inputs can be adjusted against output tax.

However, higher credit availability of credit also posed some interesting challenges. To make sure interest of consumers was protected, anti-profiteering was built into the GST law. In simple words, it meant that if businesses failed to pass on higher availability of credit, and therefore lower input costs, to the ultimate consumer, they could face penal action. Mostly, this meant that GST benefits must result in a fair reduction of prices.

Anti-profiteering rules prevent entities from making excessive profits because of GST. GST along with the input tax credit in most cases would reduce prices. But while studying about other countries its seen that in reality there has been increase in prices after GST implementation. For example, Singapore saw a hike in inflation when it introduced GST in 1994 making way for profiteering. To counter these anti-profiteering rules became a must. Thus, anti-profiteering measures at the retail level to protect consumers from price hikes were initiated. These rules were initiated in India to avoid making any profits on cost of others.

The best part under GST is that mostly all industries will be affected with respect to passing of credit benefit due to a better credit claiming mechanism under the this regime. Be it service sector, manufacturing, trading, or any specific industry, all are going to gain due to a better flow of input tax credit (except sectors having zero-rated output supply). Unlike the previous times, credit is available for most of the items used in the business. However, a clear understanding about how higher input tax credit can be used to reduce prices between different products or service lines in an organization can help avoid situations of unintentional profit making by businesses.

As a known fact, India implemented anti profiteering rules seeing its effectiveness in other countries. Australia followed a net dollar margin rule for anti-profiteering. That meant, if GST led to taxes and costs falling by $1, prices needed to fall equally. Conversely, if cost increased by that much, prices could increase too. A major class of people feel that if India too comes up with such well defined norms to assess the benefits of GST which can be further passed on, the gains from GST could augur well for both consumers and businesses. Or else we run the risk of seeing multiple lawsuits on this matter.

The writer is Founder & CEO ClearTax.

(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)

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